Blogs & Comment

Game theory and pipelines

A game theorist's insights into how the players in the Keystone XL and Northern Gateway struggles will behave.

Chesapeake Energy workers at one of the company’s Texas oil fracking operations (Photo: Michael Stravato/The New York Times)

Researching our coverage of the current oil pipeline controversies and the choices Canada has to make, I took a stab at calling some experts who in the past had used game theory to predict how development of Canada’s oilsands would unfold. Deloitte Canada and Priiva Consulting teamed up twice since 2007 to analyze the motivations of all the players and thus postulate how the crunch over labour, materials and spiraling costs would make them behave. They called their reports The Producers’ Dilemma (I and II), after the signature scenario used in teaching game theory, the Prisoner’s Dilemma.

Unfortunately, the two firms have yet to do a simulation of how the situation with Keystone XL and Northern Gateway will turn out, though Deloitte’s oil and gas consulting lead, Geoffrey Cann, agreed game theory “is tailor-made for it.” So until some clients put up money for them to run another exercise, neither Cann nor Priiva’s Gerry Sullivan would offer any predictions.

One thing the previous games did demonstrate, though, was “collaboration absolutely changes the dynamic,” Cann says. For example, a deadlock might be broken if Kinder Morgan and Enbridge, currently competing to increase pipeline capacity to the Pacific, joined forces.

Cann also had some insights into the motivation and strategy of other players. “What the environmental movement has determined is it’s nearly impossible to object to a single oilsands project because there’s so many of them and none of them have monopoly power. Their best option is to throttle it at the throat, which is the pipeline.” The greens would have less sympathy and funding for doing so if they had achieved their overriding objective of enacting a national climate strategy (involving emissions caps) in Canada and the United States. The failure of the green agenda so far has had the unintended consequence of focusing opposition on the pipelines.

China and its national oil companies, meanwhile, have become especially interested in stable countries like Canada and Australia since the Arab spring. Forced to evacuate 30,000 Chinese workers from Libya, they now find their oilfields there frozen as the new regime attempts to nationalize the assets of companies that co-operated with the deposed Ghadafi regime. “There’s a lesson in that,” Cann says.

For its part, the oil and gas industry, by pouring investment into the oilsands with little concern for how it’s going to get the oil out to markets, “is playing a high-stakes game of chicken,” Cann adds. Currently there is $134-billion worth of oilsands projects either under construction or due to break ground within three years. “It becomes hard for governments and regulators to say no.”